2024 (5) TMI 1080 - AT - Income Tax

TP Adjustment - interest on outstanding receivables - international transaction or not? - Determination of Arm's Length Price (ALP) - HELD THAT - The issue is no longer res integra. Hon'ble Bombay High Court took a view in the case of CIT Vs. Patni Computer Systems 2013 (10) TMI 293 - BOMBAY HIGH COURT on the amendment to Section 92B of the Act by way of Finance Act, 2012 with retrospective effect from 01/04/2002 that, the interest on outstanding receivables is an international transaction, and it certainly requires separate benchmarking. There is no dispute that the learned DRP in the directions dated 08/06/2022 directed AO to adopt the SBI short term deposit interest rate for the subject year as the ALP interest rate and re-compute the adjustment to be made to the total income by applying credit period of thirty days or as per the agreement or invoice. There is no appeal by the Revenue as to this direction in respect of application of credit period of thirty days or as per the agreement of invoices. AO is, therefore, under the obligation to verify the invoices and apply the credit period of either thirty days or as per agreement or invoices, whichever is longer. Rate of interest - We are of the considered opinion that the ends of justice would be met by accepting the interest rate on similar foreign currency receivables/advances as LIBOR 200 points, by applying the credit period of thirty days or as per agreement or invoice. Accordingly, we direct AO/TPO to re-compute the same. Grounds are allowed in part accordingly.

Summary

Issues:
1. Transfer pricing adjustment on software development segment and interest on delayed payment.
2. Whether outstanding receivables constitute an international transaction.
3. Determination of Arm's Length Price (ALP) for interest on delayed receivables.
4. Applicability of interest rate benchmarks for international transactions with Associated Enterprises (AEs).

Analysis:
1. The appeal was filed by the assessee against the final assessment order concerning transfer pricing adjustments on software development segment and interest on delayed payment. The Dispute Resolution Panel (DRP) had granted partial relief, leading to the final assessment order reflecting reduced adjustments. The assessee later sought rectification, resulting in the deletion of the software development segment adjustment and a re-calculation of the interest on delayed receivables.

2. The question of whether outstanding receivables constitute an international transaction was addressed, with reference to a decision by the Bombay High Court. The court held that interest on outstanding receivables is considered an international transaction requiring separate benchmarking. The DRP directed the Assessing Officer to adopt the SBI short term deposit interest rate for determining the Arm's Length Price (ALP) of interest on delayed receivables.

3. The contention regarding the ALP interest rate for delayed receivables was extensively debated. The assessee argued for the adoption of LIBOR+200 basis points, citing relevant case laws. The Mumbai Bench of the Tribunal and the Bombay High Court had previously upheld the use of LIBOR for benchmarking interest rates, emphasizing the need to consider the prevailing market rates for such transactions.

4. In determining the appropriate interest rate benchmarks for international transactions with AEs, the Tribunal considered various precedents and principles. The Delhi High Court's decision highlighted the importance of applying market-determined interest rates applicable to the currency in which the loan is to be repaid. The Tribunal ultimately directed the Assessing Officer to re-compute the interest rate using LIBOR+200 points, aligning with the judicial opinions on similar foreign currency transactions.

5. The Tribunal allowed the appeal in part, emphasizing the need to adopt a pragmatic approach in determining interest rates for international transactions. The decision aimed to ensure fairness and compliance with established legal principles, providing clarity on the benchmarking process for future assessments.